Setting a budget is always a good idea. But being accountable for your finances and spending habits may be daunting to some and natural to others.
Keeping in mind that not all budgets are equal, here are some guidelines to get you started. The goal is to understand why and how to budget according to your profile.
Setting a Budget: The Definition Of A Budget
A budget is a way one can keep account of their expenses. Setting a budget helps us live within our means and avoid spending more than we make.
Why You May Need To Create A Budget
It is wise to create a budget in various circumstances. Some of the top reasons to manage your finances are to:
1. Stay out of debt
2. Understand retirement finances
3. Save for a significant expense
4. Understand what you can afford
5. Track where you spend money
Those Who Do Not Budget
There are two distinct categories for those who may need or not need to create a budget. While both groups may benefit from financial accountability, the two groups are those who are burying their head in the sand or those who are considered affluent.
Those uncomfortable getting real with their finances generally have similar concerns. They often have much debt, are embarrassed by their lack of savings, may have a spouse who overspends, or, as the adage goes, “ignorance is bliss.”
On the extreme opposite end are the super-wealthy individuals who don’t budget. This group earns enough to save and spend at their discretion, has enormous assets, or has an inheritance. Thus they are not concerned with their current finances.
Where To Begin When Creating A Budget
Creating an effective budgeting strategy depends mainly on the individual. Some create spreadsheets and update them daily with what and where they spend, then reconcile these worksheets monthly to stay on track.
There are also budgeting software programs such as Quicken or proprietary ones created by financial advisors to attach credit cards and bank accounts. These services track and categorize your expenses, and although intuitive, they still require the human touch to assure accuracy.
Some people budget by setting up multiple bank accounts for designated monthly expenses such as personal, home, and savings. They pay into these accounts every pay period.
Then there is the automated budgeter. This person knows what they need to put aside for retirement and college savings and stays on track monthly and annually. From there, they spend the rest.
Good Reasons To Make A Budget
The importance of budgeting varies according to many factors. While not everyone needs to budget equally, there are essential situations to consider.
1. Unorganized Finances – If your financial record keeping is a mess, you need to create a budget. You need to understand what the inflows and outflows are that got you into this mess and start to keep track of where your funds are going.
2. Maintain Financial Goals – Create a realistic goal by living and subscribing to an initial budget. You can derive a true-to-life financial plan by learning what is affordable and what is not.
3. Planning For Retirement – Everyone needs to budget for retirement. Paychecks will inevitably stop, and you will need to rely on Social Security, investments, or a pension. The question is, how much do you need to retire? The answer is the amount required from your assets each year to live. And the only way to that answer is by budgeting.
Budgeting In Wealth, Health, And Happiness
Financial planning is a series of questions based on who, what, when, and why, and it is wise to learn the art of accountability in all aspects of life. Learning our inflows and outflows is a healthy exercise. Setting a budget might take work at first, but in the long run, it will secure you the financial stability needed to acquire wealth, and equally as important, peace of mind.
This post first appeared on Forbes.